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accounting terms explained

Accounting Terms Explained

We, as accountants, love our job and are fully versed in everything that we do. However, we’re aware that sometimes our clients do not understand the terminology of the accounting terms that we use. We see puzzled faces or hear questions raised – when to us they are simply an everyday occurrence!

We know that understanding how an accountant works is important, not just to us but to our clients and even to people who are starting their own business or perhaps are starting out their career as an accountant. Understanding the terminology of accounting is sensible in so many ways!

With all in this in mind, we would like to eliminate the jargon and make accounting simple and accessible to all.

Accounts – the financial statements that are prepared at the end of a financial period to reflect the profit or loss position at the end of that period.

Accounts Payable – (AP) – the amount of money a company owes in return for goods or services they have used. Also termed as trade creditors.

Accounts Receivable (AR) – the amount of money is owed from customers. Also termed as trade debtors.

Accounting Period – the time for which accounts are prepared, i.e. quarterly, yearly.

Fixed Assets (FA) – long term, usually to provide benefit in the long run. Could be property, land or large machinery.
Current Assets (CA) – assets that will be used to cover a short-term period, usually cash, inventory or accounts receivable.

Audit – the independent examination of the financial status.

Balance Sheet (BS) – a financial report that summarises the financial position of the company, including assets, liabilities and ownership/shareholder interest to date.

Capital (CAP) – the value of an asset or an amount of finance provided to enable a business to acquire its assets or sustain operation.

Capital Expenditure – the expenditure of fixed assets.

Cashflow (CF) – the revenue expected to be generated through business sales over a period of time.

Companies Act – the legislation to control the activities of limited companies.

Corporation Tax (CT) – tax payable by companies based on their taxable profits of a period of time.

Cost of Goods Sold – Costs that are directly related to goods that are sold or the services provided, usually materials or labour.

Credit (CR) – an accounting entry (right hand side of a general ledger) that will increase credit balances, usually relating to liability or revenues. It can also decrease the debit balance when used for asset and expense accounts.

Credit Note – a document given to reduce a charge on an invoice. This would usually relate to defective goods or inadequate services provided by the seller.

Creditor – a person or company that has provided goods or services.

Debit (DR) – an accounting entry (left hand side of general ledger) relating to assets or expenses. The debit entry will reduce the credit balance.

Debit Note – a document given by a purchaser to a seller at the time of returning goods to request a credit note.

Depreciation – the amount that something de-values over its lifetime, relating to fixed assets.

Dividend – the amount paid to a shareholder which would come from a company’s post tax profit as a reward for investing in the company.

Drawings – cash taken for personal use within a sole-trader or partnership business.

Equity – the sum of assets minus liabilities.

Expenses – the costs associated with running a business.
Fixed expenses (FE): regular payments that are made that do not change, i.e. rent.
Variable expenses (VE): costs that liable to change depending on circumstance, i.e. wages, labour.
Accrued expense (AE): an incurred expense that hasn’t been paid yet.
Operation expenses (OE): business costs that are not directly associated with the production of goods or services, i.e. advertising or marketing, insurance expenditures.

Financial Statements – the financial statements that are prepared at the end of a financial period to reflect the profit or loss position at the end of that period. Known as the ‘accounts’.

Forecast – the estimate of future financial outcomes based on historical data and predictions.

Gross profit – the total cost of income prior to deductions

General Ledger – the record of all general financial transactions relating to a business over its lifetime. It will include a company’s assets, liabilities, equity, revenues and expenditure.

Inventory – the record of business assets and their value.

Invoice – a document which details and itemises a transaction between buyer and seller.

Lease – the requiring of an asset through a rental agreement.

Liabilities – debts owed by a business.

Limited Liability – a form of legal protection for shareholders and owners which prevents individuals from being held personally responsible for their company’s debts or financial losses.

Liquidity – the ability to pay short-term obligations. The ability to convert its assets to cash in order to pay its liabilities when they are due.

Net Assets – Assets minus liabilities.

Net Profit – The profit of a company after operating expenses and all other charges including taxes, interest and depreciation have been deducted from total revenue.

Return On Investment (ROI) – data used to measure financial performance relative to the amount of money invested. Calculated by dividing net profit by the cost of investment.

Partnership – Two or more people in business together with the aim of making a profit.

Profit – revenue minus expenses.

Profit and Loss Account (P&L) – A financial statement used to measure a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time.

Reserves – retained earnings that have been set aside for a particular purpose.

Secured Loan – money borrowed against an asset that you already own.

Share Capital – the funds that a company raises in exchange for issuing an ownership interest in the company in the form of shares.

Share Certificate – a certificate that identifies an investors ownership share in a company.

Shareholders – an individual or entity that owns a share of the company which will allow them certain rights or say.

Stock – the value of goods that you have on hand to sell to a customer. The inventory of goods held.

Turnover – the net sales generated by a company.

Now it’s time to put these terms to practice! We hope that it’s helped to explain some of our accounting terms and jargon and to help you as individuals understand the meaning behind what accountants do.

If you are starting a business or you are looking into accounting, it’s always good to get familiar with the terminology associated with what you’ll be working with.

If you’d like any further advice, please feel free to give us a call!

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